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General advice!

Discussion in 'Managed Funds & Index Funds' started by Ems, 7th Jun, 2007.

  1. Ems

    Ems Member

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    Hi All,

    I have 2 negatively geared properties and am looking to buy some shares/managed funds to help with cashflow.

    I have about $5k to invest and can contribute about $1k a month into the funds.

    I'm very new to shares/managed funds and would like to start off small with little risk.

    I have read a few posts about Navra and this interests me.

    At present what are the average returns for Navra and do you think this is a good place to start?
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Navra have returned around 20%pa for the last 3 years, of which about 15% was distributed as income (I expect this year will be about the same ... 15% or so income).

    Whether the fund will continue to produce this level of income in a down market is yet to be seen (we haven't experienced such a market since the fund started !!).

    I hold Navra in my portfolio for exactly the reasons you mentioned - to help with cashflow (I also see it as a semi-defensive fund too). Currently it is about 24% of my fund portfolio.
     
  3. Ems

    Ems Member

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    Thanks Sim!

    20% pa is very good. So if I was to start off with $5k then contribute $1k a month I would still receive around $20%pa with 15% as income? (Of course I know this may change)

    I'm looking at the retail fund. Is this available with my plans? Lump sum to start off then monthly contributions?

    I see there's a 4.4% contribution fee attached to the retail fund. Does this mean everytime I contribute money I pay a fee of 4.4%?
     
  4. handyandy

    handyandy Well-Known Member

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    Not if you go through a discount broker. I use investsmart they rebate the 4% and also ones you reach about $100k of funds any further trailing commissions thru their trailing cap product.

    Cheers
     
  5. Steve

    Steve Well-Known Member

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    Hi Handy.

    Investsmart sound like the way to invest into managed funds. Have you had any problems or issues with them, or is it all straight forward?

    The trailing cap sounds very interesting. I'll look into that.

    Thanks.

    Steve.
     
  6. handyandy

    handyandy Well-Known Member

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    I have had no problems with them thus far. I expect my first trailcap cheque for this financial year.

    You can just get one of their forms of the web site and reassign them as the FA this will then redirect the trailing coms through them.


    Cheers
     
  7. DaveA

    DaveA Well-Known Member

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    how does it work with investsmart if you are using a margin loan, say LE or Suncorp???? I know comsec you get the return entry fee, but do you say request an investsmart pds and then send it to your margin lender for them to write the check and on forward it to the company???
     
  8. FrankGrimes

    FrankGrimes Well-Known Member

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    This will answer your question!

    http://www.invested.com.au/7/getting-entry-fee-rebate-through-margin-7759/
     
  9. Simon

    Simon Well-Known Member

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    Thats what I do.

    Unfortunately there are only a limited amount of managed funds that investsmart will rebate trail on - there are only a few that will send electronic statements to investsmart for them.

    Navra is not one of them and so they do not rebate the trail for them. But you can avoid the upfront commissions if you decide to forego any investment advice and just submit an application yourself.

    Cheers,
     
  10. PaulA

    PaulA Member

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    There's also a company called YourShare - managed fund who rebate 100% of entry fees and 50% - 70% of all trail fees regardless of who the fund manager is. They will also rebate on your insurance policies.
     
  11. MJK

    MJK Well-Known Member

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    I thought trails where paid by the fund rather than deducted from the investor anyway?

    MJK
     
  12. PaulA

    PaulA Member

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    Hi MJK,
    All fund managers are different, some take the trail direct from your fund account, others pay the trail from the MER they charge you every year. However regardless of how the trail is paid it is still an expense that you as unit holders of the fund must meet. Even where you went directly to the fund manager, a trail is being paid - its just being retained by the fund manager.
    Thats why YourShare is so great - all your existing funds, super, master trusts, wraps, insurance products, etc. YourShare will collect the trail and rebate 50% - 70% back to you every year.
     
  13. crc_error

    crc_error The Rule of 72

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    Why would you buy low return direct residential property (7%PA) when you can invest your money into excellent funds like this with 20%PA return?

    Am I missing something?

    Me has choice, put money into 8%PA investment or 20%PA investment... hmm choice is hard...
     
  14. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I get far more than 7% return on my property (recent purchases doubled in value in less than 4 years), I gear it to 90%+ and it's far less risky (no margin calls). The only problem with growth property is that it can be a cashflow drain in the short term. Which is why I invest in BOTH property and managed funds.

    My managed funds pay for my property portfolio.
     
  15. Nigel Ward

    Nigel Ward Team InvestEd

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    Yes - leverage. You can get 95% lvr plus capitalised lender's mortgage insurance with resi property.

    With shares or managed funds you'll get 75% lvr at best and due to the market's natural fluctuations realistically you'd probably gear no more than say 65%...

    Ignoring brokerage costs but allowing say 3%pa for property costs that if you had say $200k to invest then the outcomes after 10 years to have around 1.7m in equity requires the following returns:

    1) Property geared at 90% you need only a 6%pa return FOR 10 YEARS
    2) Shares/funds geared at 65% you need a 14%pa return FOR 10 YEARS
    3) Ungeared shares/funds you need a whopping 24% return FOR 10 YEARS (which is Warren Buffett territory!)

    Of course the initial stamp duty and ongoing land tax are a factor and may be significant...BUT that is outweighed I think by the fact that there's also more extra equity available to harvest sooner with the property option...

    If you extend the model out for say another ten years eventually the massive return from ungeared shares at 24% wins out but if you can average 24%pa or even 14%pa for 20 years then you should be running a fund!

    Of course if you can get the returns from property up to say 8% it blows the other options out of the water...or even gear at say 95%...

    Run your own simulations but residential property, highly geared, with regular reinvestment of the equity (in funds/shares and then more property) seems a pretty safe option to me...

    Cheers
    N.
     
  16. crc_error

    crc_error The Rule of 72

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    Hi Nigel,

    Thanks for your comments, and yes they make sense. However it is unrealistic to say that you can keep on adding property to your portfolio at 95% gearing.

    Yes you can do it with your FIRST property, but subsequent properties should be geared at no more than 80%.

    I did exactly what you said, purchased 3 negatively geared properties at 90% LVR only to find that the negative gearing killed me.. I was paying out $35,000 PA in losses on my tax return, and you keep on doing that in times where property didn't move much!! I did it for 5 years, and in the end, didn't really come up ahead if you counted the losses over the years in the final capital gain.

    Had I put the same commitment into the CFS Australian geared share fund, I would have been quite a bit in front. (2000 to 2005)

    Added to that I consistently had problems to attend to, ie blown heaters, criminal tenants, drag queens, and tenants who shoot through 1/4 way through lease, and then vacancies. With 3 properties, there was something happening almost each month. Then came the RBA sitting, and each month I held tight praying for no further rate rises.

    But then you say, put money in a income fund like Navra to offset losses, well essentially all your doing is lowering your LVR for the properties.

    On the flip side, with managed funds, I don't have any worries, no blown heaters, tenants to deal with etc etc. I can gear it easily, and I can actually gear to 100% via certain products.. Like the Fusion Funds you can choose select managed funds and gear 100% into them. So LVR is actually HIGHER in shares/funds if you are looking at this.

    The other thing is if I want to increase my gearing (because the asset value has gorn up) with shares, I can do so with nil cost.. with property I have to get valuations, bank setup fees, mortgage insurance etc etc.. very costly..

    I believe in yes, initially property CAN be a good place to start due to its high gearing, but subsequent investments are better handled via funds. Anyway I still reckon your better using 100% gearing into funds via Fusion Funds over property purchase. Firstly you don't need ANY deposit to get started, so anyone can start straight away, secondly entry costs are allot lower, thirdly your commitment is set at a level you can afford, with property, to get quality property, you need to buy a house close to the capital cities, which is out of reach for many new investors.

    Investments MUST be able to stand on their own two feet, not requiring consistent top ups from your wage, otherwise you can't keep on building and moving onto new investments.
     
  17. Jacque

    Jacque Team InvestEd

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    Why indeed would you buy resi property with as low an overall return as 7%? I know I wouldn't either :D

    And I stress the total return here, as this is what counts with direct property investment. The rental yield plus capital growth per annum should ideally equate to an average of 12-15% over the long term (10yrs+ or a full cycle) and if you're not likely to achieve this with your selection of property, then reconsider your options.

    CRC, I do empathize with the hassle of property ownership, however, as opposed to the ease of holding shares/funds/LPI's etc, and know that sometimes, like you, I've seriously looked at the stresses associated with being a landlord and wondered why I got into it all in the first place!

    However, having properties that have appreciated enough over time for me to further leverage the equity into other investments has certainly paid off in my situation. For me, it's about the growth that has allowed me to move forward.

    And who says you have to keep dipping your hand into your pocket for your IP's to stand on their own? Yes, I'll be the first to admit that, due to increasing prices and entry and exit costs, real estate by it's very nature is usually an asset that requires real cash losses. However, this isn't true in every region and I'm sure investors like Margaret Lomas and Steve McKnight would be the first to disagree with you here :D

    To give you an example, a property I recently sold in regional NSW not only appreciated just in growth by an average of 15% for the five years I held it, but the gross yield on it improved from an initial 8% to 10.8% currently. I did no improvements on this property except for the usual repairs and maintenance. This property has caused me no stress whatsoever, and even less so when I collect the settlement cheque later this week :D

    At the end of the day, you are comparing two different investment vehicles with differing risk profiles. No need to ignore one and concentrate on the other. As the gods of financial planning say, diversify :D
    It makes for more interesting investing, anyway!!
     
  18. ilori

    ilori Well-Known Member

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    Hi, my two cents worth... interesting topic comparing real estate to shares/funds...

    True, it seems several -ve geared properties can become too much for most people because begin to drop down thru the tax brackets and the benefits reduce. The -ve gear losses are theoretically a trade-off for the future capital gains however... so it's critical to buy in areas with strong capital growth potential.


    Points I've seen supporting real estate include:

    * leverage - certainly a powerful point when work out return on YOUR money (I heard a wealthy investor say that 'leverage' is the number 1 reason he invests in real estate... it's simply an investment vehicle to him that maximises return on his money due to use of other people's money)

    * can directly increase it's value & rent by renovating, solving problems, changing it's nature etc., this has effect of speeding up the property cycle for your property (speed up cycle & outperform general market) - can't do this with shares/funds

    * it has intrinsic value (eg. land content, shelter) and will always be worth something - shares/funds etc. can fall to zero value

    * banks/lenders still (and always will?) love real estate and compete to loan money to buy it

    * paper losses - depreciation - help with tax (but secondary consideration to investment quality as a whole)


    Points I've seen supporting shares/funds include:

    * more liquid - can get your $ out quickly if need to

    * not as 'chunky' as real estate - can buy smaller amounts

    * simple / no human issues / time efficient maybe


    I heard someone say... "if you believe real estate is a great investment or if you believe it is a terrible investment... you'll be right".

    I suppose similar concept is true of most things... the mindset is important whatever we do :) People make money in all sorts of ways...
     
  19. Nigel Ward

    Nigel Ward Team InvestEd

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    Hi CRC my responses in italics below


    All the above offered in good faith and to further the discussion. Not criticising your efforts or suggesting I have an infallible crystal ball on asset class timing...just my views and observations.

    Cheers
    N.
     
  20. crc_error

    crc_error The Rule of 72

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    This is correct, property is only a good investment when its chewing up 40%+ tax brackets. And this is the issue I find, decent areas I would say are within 10-15km of a capital city which are costly to buy. I also believe a house offers better capital growth potential.


    Leverage is certainly not exclusive to property. I can leverage up to 100% plus the first years interest on managed funds via Fusion products, or get 100% for shares via protected lending. These products come with a capital guarantee at the maturity of the term. Do you get this with property?

    This is one thing you can't do with shares/funds, so I accept this is a unique benefit for direct property ownership. Although I do question the profitability of these rejuvenations these days. I know in 2000 when I did this with my house it worked wonders!


    And so does a bank, infrastructure, coal mine, supermarkets etc. The only time a share would become a value of zero would be if you buy spec stock which goes belly up.. I hardly think Wollies would become a value of zero. Is there a time where people stop buying food? You can also buy funds which invest in direct commercial property... but with lower risk through diversification as the portfolio may have 10-20 properties.


    They also love managed funds.. actually they love managed funds and shares MORE than property. If I want a margin loan, it gets setup with minimal paper work.. No need for expensive valuations, credit checks, convincing the bank, convincing the mortgage lender your a acceptable risk, you can afford it etc.. A margin loan gets setup within 24 hours, can you get a home loan fully approved this quickly? Its allot easier to get 2 million approved for margin lending than it is to get 2 million for property.

    Depreciation is a REAL loss, not a paper loss. The government wont give you a deduction on something which ISN'T a REAL loss. When you deprecate a property items, its because in 5-7 years you need to replace them. Do you really think the stove in your house is a paper loss when its really going up in value? What goes up in value is the land, NOT the building. How often do you think you need to replace the kitchen? Bathroom? Carpet? Curtains? and more.. all become worn and outdated.. a further COST to the owner when the renovation project comes up..


    You can add to that... up to 100% gearing, no expenses to hold, no house insurance, no land tax, no stamp duty, no mortgage insurance, no rates, no water bills, no blown hot water units on xmas eve, better capital growth, instant valuations so you can draw down equity.. Property grows at 7-8% PA, whereas the index of the ASX grows at 14%.. I have funds averaging 20% PA ungeared over the last 7 years.. Has property produced these returns for you over the last 7 years? Add gearing into the equation and your laughing!!



    Good conclusion. I'm not saying property is a BAD investment, but I think there are better ways to get the same, if not better result with far less hassles. Sure from a diversification point of view, its probably good to have a direct residential property in there, but from my personal experience, using managed funds to invest in a variety of asset classes is the way to go.